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Is the Stock Market Close to Bottoming?

Is the Stock Market Close to Bottoming?
By Ron DeLegge, Editor
February 20, 2009

SAN DIEGO ( Ė How low can you go? Thatís a question that limbo dancers typically ask each other. It also happens to be the same question equity investors are asking. How low can stocks go?

On February 17th, President Obama signed into law a $787 billion stimulus bill and the Dow Jones Industrial Average closed the day at 7,552.60. Bailout 2.0 is the most sweeping economic stimulus package in recent history, with the exception of Bailout 1.0, a $700 billion monstrosity which was mainly meant to help sinking financial institutions. In case you havenít noticed, the stock marketís reaction to both bailouts has been strikingly similar.

My colleague Simon Maierhofer pointed out the Dow Jones (NYSEArca: DIA) dropped 30% after the first bailout package was approved on October 2nd. On February 3rd, he wrote an article with titled, ď11 ETFs for the Dow 6,500 Portfolio.Ē My initial reaction at his take was a sarcastic chuckle, but it now appears that Dow 6,500 is within striking distance.

Now more than ever, itís important to have a panoramic view of whatís happening in the financial markets. Beyond stocks, itís vital that you have a clear picture of what investment themes are working and which ones are not. Repeating the same mistakes of the investing masses is not a recipe for success.

Hereís a quick snapshot of whatís hot and whatís cold.


Letís begin with 3 ETFs that have upward momentum.

iShares Silver Trust (NYSEArca: SLV)
This grantor trust or silver ETF as it's referred to is built to follow the price of silver bullion. So far this year, SLV has jumped 24%* in value, which has outdone the 10.7% gain for gold (NYSEArca: GLD). Silver tends to be more volatile than gold and in 2008 SLV fell 27.24% whereas gold eked out a gain of around 4.5%.

iShares MSCI Brazil ETF (NYSEArca: EWZ)
Gross domestic product (GDP) growth in most emerging market countries is quickly decelerating and in many cases turning negative. Brazil is one of three emerging market countries likely to still post modest GDP gains, despite a global recession in economic activity. In 2008, EWZ fell 55.8% but so far in 2009 itís up 2.5%.

Market Vectors Gold Miners (NYSEArca: GDX)
Do you invest in gold itself or in gold mining stocks? Depending on whom you ask, youíll get varying responses. Historically speaking, gold stocks have around one-and-a-half to two times the volatility of gold. While gold stocks are closely linked to the performance of gold and other metals, they sometimes diverge. In 2008, GDX fell 26.56% whereas gold gained 4.5%. So far in 2009, GDX is up 5.2%.

Now, hereís a list of 3 ETFs with downward momentum.

Financial Select Sector SPDR (NYSEArca: XLF)
The nationalization of major U.S. banking institutions is imminent. Many economists agree this is the only temporary solution to restoring the sick banking system back to health. Itís important to note, the XLF doesnít just contain exposure to banking stocks, but it also has stocks of asset managers, brokers, specialty finance and insurance companies. So far in 2009, XLF has dropped 39.7% lest I remind you it cratered 55.21% in 2008.

Industrial Select Sector SPDR (NYSEArca: XLI)
Industrial stocks have not (yet) responded well to the governmentís multi-billion infrastructure plan. The spending spree hasnít started yet, so itís too early to report what sort of impact, if any, this will have on earnings. Of the 9 S&P industry sectors, only financial stocks are worse performers than industrials. So far in 2009, XLI has dropped 19.3% and last year it declined by 38.88%.

Vanguard REIT ETF (NYSEArca: VNQ)
After several years of outperforming the broader stock market, real estate stocks hit a wall. The steep drop that began in U.S. residential real estate is now spreading to commercial real estate. Itís depressing asset values and many large REITs are losing tenants. In 2008, VNQ declined by 36.89% and so far in 2009 itís off by 33.1%.

What Now?
If the stock marketís reaction to the first bailout fully imitates the 30% decline in Dow stocks after the first bailout was passed, that would put the Dow Jones Industrial Average in the neighborhood of 5,287. Donít accuse me of being a bear either, because Iím not. Stocks have already compromised their November 2008 low of 7,552.29 and Dow stocks are currently trading at 1997 levels. But thatís not all.

In each edition of our ETF Profit Strategy Newsletter we assemble a comprehensive ETF hot list and cold list. The point is to give ETF investors perspective on what investment themes are working and which ones arenít working. If youíre going to make money in this veracious bear market, itís important to position your financial assets accordingly. What weíve given here is just a snapshot. If youíd like to see the full portrait, check out the newsletter. In summary, donít be fooled by the media headlines. People that are using the right financial products with the right investment strategies usually get the right results Ė in any kind of market.

*Performance figures quoted are YTD thru 2/19/09 market close

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